When Should Companies Share Information with Competitors?
It seems like common sense that firms should keep hard-won knowledge about new opportunities to themselves. But a study by Yale SOM’s Tristan Botelho suggests that, under certain circumstances, companies could benefit from sharing detailed information with competitors.
By Roberta Kwok
In 2014, Tesla announced that other firms would be allowed to use its patented technologies. The practice seemed to defy the commonly held view that companies should protect their knowledge from competitors.
But a new study suggests that perhaps Tesla’s strategy wasn’t misguided. Tristan Botelho, an assistant professor of organizational behavior and faculty affiliate of the Program on Entrepreneurship at Yale SOM, examined why people might share information with competitors. In analyzing data from an investment knowledge-sharing website, he found that buy-side investment professionals, such as analysts and portfolio managers at hedge funds, tended to publish detailed explanations of their buy-and-sell recommendations when there was more uncertainty about whether others would identify the market opportunity—what Botelho calls “buy-in uncertainty.” Under those conditions, investors might benefit from using this detailed knowledge to convince others to adopt the same position rather than keeping the analysis to themselves.
“Firms and the people who manage them are conditioned to think that knowledge is an important source of competitive advantage, and therefore it all has to stay with us,” Botelho says. “But this brings to light the possibility that at certain times knowledge is also valuable outside the firm."
Read the study: “Here’s an Opportunity: Knowledge Sharing among Competitors as a Response to Buy-In Uncertainty”
Many companies, increasingly aware of the benefits of sharing knowledge among their employees, have expanded this practice—for instance, by setting up digital platforms where workers can exchange ideas and best practices. “This is happening more and more within a firm,” Botelho says. “Could it happen across firms?”
Previous research suggested that competitors may share knowledge with each other if they already have a direct relationship and can expect to get information in return. But Botelho was curious about situations such as conferences and other platforms where professionals sometimes present firm-sensitive details to large audiences.
He formulated a hypothesis to explain why people might share information with competitors. Consider a company that sees an opportunity—say, a stock to invest in or a new technology to develop. The firm may lack the resources, such as funds or employees, to fully exploit that opportunity. To extract more value, it often needs others to recognize the opportunity as well.
One example is investing. Buying an undervalued stock on one’s own isn’t going to boost the price. But if many other investors also recognize this opportunity and buy it, the price will eventually rise—allowing the first investor to reap the benefits. Another example is pursuing a new technology. If consumers are reluctant to try something unfamiliar, it may be beneficial to have competitors developing similar products because they can help educate the public about the concept.
Botelho predicted that sharing knowledge would be more common when it was unclear whether others would buy into the opportunity. “When you’re less certain that will happen naturally over time, you’re going to be motivated to force that to happen,” he says.
To test the idea, Botelho used a data set from a digital platform where investment professionals can share buy and sell recommendations. They can provide a brief explanation or a longer, detailed justification; the longer entries typically contain valuable analysis, according to Botelho. For each entry, he also tracked several factors that might contribute to buy-in uncertainty, such as lack of media coverage or whether the firm was relatively new.
Botelho found that when this buy-in uncertainty was higher, investors were more likely to provide detailed justifications for their investment recommendations. Longer explanations also were more likely when the investor recommended short selling, probably because short sales are extremely risky and require others to take the same position to succeed. The technique seemed to work; after detailed explanations were posted, prices tended to move in the direction the investor had predicted.
Botelho ruled out some alternative explanations. People didn’t seem to solely be sharing knowledge because they wanted to get feedback and make decisions based on others’ comments; indeed, they usually bought or sold the stock before submitting recommendations. And sharing didn’t seem to be a strategy used mainly by junior investors to build reputations. Senior investors were just as likely to share.
The results don’t mean that competitors should share knowledge indiscriminately. “You have to be smart about it,” Botelho says. For instance, the company sharing information about a new technology should have a first-mover advantage, so it doesn’t lose more than it gains by tipping off competitors.
But knowledge sharing may make sense in the right situation. “There are certain conditions where firms can seriously consider it as a strategy to improve their performance. Although knowledge is often part of a firm’s competitive advantage, what is key is maximizing value, and this research shows that sometimes sharing that knowledge adds value,” he says.
Botelho believes the results could apply to other sectors as well. There are many situations in which getting buy-in from others improves one’s ability to profit from an opportunity. One example he cites is entrepreneurship.
“I regularly talk with entrepreneurs who do not want to divulge any part of their idea,” he says. “However, entrepreneurs often face buy-in uncertainty from various resource holders. Engaging in more knowledge sharing may help others more quickly realize the opportunity the entrepreneur has identified, or lead others to work on something that is complementary which may help the entrepreneur.”